Weak Currency May Be Existential Threat to Iconic 100-Yen Shops

(Bloomberg) -- The supremacy of Japan’s 100-yen shops, long a symbol of an economy stuck with flat to falling prices for almost three decades, is beginning to crumble.

A weaker yen pushing up the cost of imported goods, spiking energy prices and climbing raw material costs are making it harder for Daiso Industries Co., Seria Co. and other 100-yen store operators to operate in an inflationary environment.

Japan’s 950 billion yen ($7 billion) 100-yen shop market is struggling to figure out how to pass on increased costs without turning away an entire generation of consumers accustomed to deflation. It’s an especially tough challenge because wages aren’t increasing. The Bank of Japan’s efforts to kick-start inflation for more than a decade hasn’t delivered a healthy economic cycle of rising incomes and prices for goods and services.

“One yen cheaper” is what Minoru Akaike and other consumers are looking for when they visit 100-yen shops. The 40-year-old service-industry worker was recently at a Daiso shop in Mitaka in western Tokyo, hunting for a dish sponge at a cheaper price than the local supermarket.

Like dollar stores in the US, Japan’s 100-yen establishments emerged as a convenient way to shop for items while keeping track of the total at the cash register. Unlike their American counterparts, however, Japan’s outlets cater to a wide range of income levels and offer everything from cosmetics and stationery, to cooking utensils and cat food.

Suppliers have been seeking to raise the prices of goods they provide to B-One, a 100-yen store in Tokyo’s Kanda area. The weak yen and rising energy and material costs are making it difficult to sustain a business model that depends on slim profit margins and a high sales volume, according to the store manager, who asked not to be identified because the information isn’t public. 

One supplier for garbage bags recently raised its prices, so instead of passing that along to consumers, the manufacturer reduced the quantity in each package by five items, the B-One manager said.

Seria, which operates about 1,700 stores nationwide, is forecasting a 4.2% rise in sales for the fiscal year through March, while warning that operating profit will decline by 16% to 17.5 billion yen.

Can Do Co., another listed 100-yen shop operator, said in its recent financial statement that “conditions remain challenging due to rising global material costs and the situation in Ukraine.”

In the US, where inflation is more rampant, dollar stores are no longer selling items for a buck. This year, Dollar Tree Inc. boosted its standard price point to $1.25 for a majority of products, abandoning the approach that gave the discount chain its name.

In the past, 100-yen shops were able to respond to yen weakness and higher material costs by changing the size and quantity of packaging, but that’s now becoming more difficult because suppliers aren’t used to sudden price changes after a long period of stability, according to Kuni Kanamori, retail analyst at SMBC Nikko Securities Inc. 

Japanese companies say they can pass on just 44% of higher costs to customers on average, according to a June survey by researcher Teikoku Databank Ltd. About 15% of those surveyed across a range of industries said they can’t pass on cost increases at all.

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